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280 U.S.

412
50 S.Ct. 177
74 L.Ed. 518

UNITED STATES
v.
AMERICAN CAN CO. SAME v. MISSOURI CAN CO. SAME
v. DETROIT CAN CO.
Nos. 128-130.
Argued Jan. 21, 1930.
Decided Feb. 24, 1930.

The Attorney General and Mr. Charles E. Hughes, Jr., Sol. Gen., of
Washington, D. C., for the United States.
[Argument of Counsel from page 413 intentionally omitted]
Mr. Graham Sumner, of New York City, for respondent.
[Argument of Counsel from page 414 intentionally omitted]
Mr. Justice McREYNOLDS delivered the opinion of the Court.

In the courts below these causes were heard together, and one opinion here will
suffice.

Respondent the American Can Company owned the entire capital stock of
respondents Missouri Can Company and Detroit Can Company. All were
incorporated under the laws of New Jersey and had their legal residences and
principal offices therein. Their places of business were within the Second
United States Internal Revenue District of New York. William H. Edwards,
formerly Collector for that district, retired in 1921; Frank K. Bowers succeeded
him. During Edwards' term he demanded and collected from these three
corporations income and excess profits taxes for 1917 aggregating more than
$5,200,000. Thereafter Collector Bowers exacted of them above $3,300,000 as
additional income and excess profits taxes for the same year.

In January, 1926, respondents instituted actions against the United States in the
District Court for New Jersey, as permitted under U. S. Code, 41, par. 20, 28
USCA 41 (20) (Judicial Code, 24, par. 20; Revenue Act, Nov. 23, 1921, c.
136, 1310(c), 42 Stat. 311; Revenue Act, February 24, 1925, c. 309, 43 Stat.
972). They sought to recover with interest more than $2,700,000 paid, as they
alleged, to Edwards in excess of taxes properly assessable to them for 1917.
Judgments against the United States for the amounts claimed were affirmed by
the Circuit Court of Appeals, Third Circuit, March 5, 1929; and the matter is
here upon certiorari.

They also sued Bowers, Collector, in the District Court, Southern District of
New York, to recover the additional taxes for 1917 ($3,300,000) demanded by
and paid to him. These suits involved the same questions as those presented in
the causes now before us. Judgments went for Bowers, Collector. The Circuit
Court of Appeals, Second Circuit, affirmed them November 4, 1929. American
Can Co. v. Bowers, 35 F.(2d) 832.

The opinions and judgments in the two Circuits upon the same facts are thus in
direct conflict.

Pertinent provisions of the statutes and Treasury Regulations are printed in the
margin.1

The accounts of respondents were kept during 1917 not upon the basis of actual
receipts and disbursements but upon the accrual basis-that is, pecuniary
obligations payable to or by the company were treated as if discharged when
incurred. Purporting to proceed as permitted by section 13(d), Title I, Revenue
Act of 1916 (39 Stat. 771), they made returns to the collector upon the same
basis. The Commissioner ascertained that the books showed excessive
inventory values and thereby indicated net incomes much too small. The
valuation placed on large quantities of tin plate had been marked up from $3.60
per box to $7, and the higher rather than the lower cost of this raw material had
been reported. Thereupon, he disallowed the inflation, corrected the erroneous
entries, and made reassessments according to the returns so modified.
Respondents claimed that this action amounted to rejection of the basis upon
which their returns and been made. Also that, after such rejection, no
assessment could be made except one based upon receipts and disbursements;
that is, upon amounts ascertained by deducting from gross income received,
expenses paid out, losses charged off, interest, and taxes (section 12, Act 1916,
39 Stat. 767). And, further, that computation should be made without regard to
inventories.

The District Court of New Jersey and the Circuit Court of Appeals, Third
Circuit, accepting respondents' view, awarded and approved judgments against
the United States aggregating some $4,000,000. The result, we think, is
manifestly erroneous. Upon the findings, judgments should have gone the other
way.

The claims of respondents rest upon improper construction of paragraph (d),


13, Act of September 8, 1916. This provides that 'a corporation * * * keeping
accounts upon any basis other than that of actual receipts and disbursements,
unless such other basis does not clearly reflect its income, may, subject to
regulations * * * make its return upon the basis upon which its accounts are
kept, in which case the tax shall be computed upon its income as so returned. *
* *'

10

'Basis of keeping accounts' as there used refers to the general bookkeeping


system followed by the taxpayer and not to the accuracy or propriety of mere
individual items or entries upon the books. And to correct an improper item in a
return-whether the result of mere error or designed-cannot properly be said to
constitute rejection of the basis upon which the return was constructed. The
statute empowers tax officers to make necessary rules and regulations and to
take action essential to orderly enforcement of the obligations imposed. Here
the taxpayers kept their accounts on the accrual basis and elected to make their
returns accordingly. They cannot complain because an item therein was
changed so as to conform with admitted facts. If their returns had been made on
the basis of actual receipts and disbursements, certainly they would have been
subject to correction for errors without changing the basis; and the same thing
is true of returns framed upon an accrual basis.

11

United States v. Anderson, 269 U. S. 422, 437, 440, 443, 46 S. Ct. 131, 70 L.
Ed. 347, considered the meaning of sections 12(a) and 13(d), Act of 1916, and
sustained the action of the Commissioner who had reassessed according to an
adjusted return originally made up on the accrual basis.

12

We need not discuss the question whether under any circumstances the taxable
income of a manufacturing or mercantile corporation can be ascertained without
reference to inventory values. Certainly, in most instances, where the taxpayer
carries on an extensive business, this cannot be done.

13

The challenged judgments are reversed. The causes will be remanded to the
District Court for appropriate action in harmony with this opinion.

14

Reversed.

The Revenue Act of September 8, 1916, c. 463, sec. 10 (39 Stat. 765), imposed
taxes reckoned upon the amount of income.
The Act of October 3, 1917, Chap. 63, 40 Stat. 300, 302, 303, 305, increased
the income tax rates; also imposed an excess profits tax. It provided:
Title I, 4. 'That in addition to the tax imposed by subdivision (a) of section ten
of such Act of September eighth, nineteen hundred and sixteen, as amended by
this Act, there shall be levied, assessed, collected, and paid a like tax of four per
centum upon the income received in the calendar year nineteen hundred and
seventeen and every calendar year thereafter, by every corporation, joint-stock
company or association, or insurance company, subject to the tax imposed by
that subdivision of that section. * * *
'The tax imposed by this section shall be computed, levied, assessed, collected,
and paid upon the same incomes and in the same manner as the tax imposed by
subdivision (a) of section ten of such Act of September eighth, nineteen
hundred and sixteen, as amended by this Act, except, &c. * * *
'Title II-* * *
'Sec. 201. That in addition to the taxes under existing law and under this act
there shall be levied, assessed, collected, and paid for each taxable year upon
the income of every corporation, partnership, or individual, a tax (hereinafter in
this title referred to as the tax) equal to the following percentages of the net
income: * * *
'Sec. 206. That for the purposes of this title the net income of a corporation
shall be ascertained and returned * * * (c) for the taxable year upon the same
basis and in the same manner as provided in Title I of the Act entitled 'An Act
to increase the revenue, and for other purposes,' approved September eighth,
nineteen hundred and sixteen, as amended by this Act, except. * * *'
The Act of September 8, 1916, 39 Stat. 756, 765, 766, 767, 770, 771, c. 463,
provided:
Title I, 10. 'That there shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding calendar year from all
sources by every corporation, joint-stock company or association, or insurance
company, organized in the United States, no matter how created or organized

but not including partnerships, a tax of two per centum upon such income; * * *
'Sec. 12(a). In the case of a corporation, joint-stock company or association, or
insurance company, organized in the United States, such net income shall be
ascertained by deducting from the gross amount of its income received within
the year from all sources' (Expenses, losses, interest, taxes.)
'Sec. 13(a). The tax shall be computed upon the net income, as thus ascertained,
received within each preceding calendar year ending December thirty-first: * *
*
'(b) Every corporation, joint-stock company or association, or insurance
company, subject to the tax herein imposed, shall, on or before the first day of
March nineteen hundred and seventeen, * * * render a true and accurate return
of its annual net income in the manner and form to be prescribed by the
Commissioner of Internal Revenue, with the approval of the Secretary of the
Treasury, and containing such facts, data, and information as are appropriate
and in the opinion of the commissioner necessary to determine the correctness
of the net income returned and to carry out the provisions of this title. The
return shall be sworn to by the president, vice president, or other principal officer, and by the treasurer or assistant treasurer. The
return shall be made to the collector of the district in which is located the
principal office of the corporation, company, or association, where are kept its
books of account and other data from which the return is prepared, * * *
'(d). A corporation, joint-stock company or association, or insurance company,
keeping accounts upon any basis other than that of actual receipts and
disbursements, unless such other basis does not clearly reflect its income, may,
subject to regulations made by the Commissioner of Internal Revenue, with the
approval of the Secretary of the Treasury, make its return upon the basis upon
which its accounts are kept, in which case the tax shall be computed upon its
income as so returned. * * *'
Treasury Decision No. 2609, promulgated December 19, 1917:
'(1). For the purposes of income and excess-profits tax returns, inventories of
merchandise, etc., and of securities will be subject to the following rules:
'A. Inventories of supplies, raw materials, work in process of production, and
unsold merchandise must be taken either (a) at cost or (b) at cost or market
price, whichever is lower, provided that the method adopted must be adhered to
in subsequent years, unless another be authorized by the Commissioner of
Internal Revenue. * * *

'C. Gain or loss resulting from the sale or disposition of assets inventories as
above must be computed as the difference between the inventory value and the
price or value at which sold or disposed of.
'(2). In all other cases inventories must be taken at cost or at value as of March
1, 1913, as the case may be.'